- The move will replace more than a dozen levies with a new goods and services tax. (Reuters)
- Seized vehicles. Bribes. Days-long delays. Moving goods across Indian states isn’t exactly easy — and that’s a major barrier to economic growth.
- That should help reduce the immense power India’s myriad middlemen wield at state borders, free up internal trade, make it easier to do business and widen the country’s tiny tax base.
- While India already boasts one of the world’s fastest growing major economies, architects of the reform say it will stoke efficiency and growth by creating a common market of 1.3 billion consumers — a population greater than the U.S., Europe, Brazil, Mexico and Japan combined.
- Take the border crossings: Lorry drivers in India lose 60 percent of transit time to road blocks, tolls and other stoppages, which means logistics costs are up to three-times higher than international benchmarks. While truck drivers may still need to stop to have their goods checked, cut that time in half, and logistics costs could fall by up to 40 percent, according to a 2014 World Bank report.
- India will have four tax brackets instead of the flat rate many other countries have.
- The incoming GST will also force companies to consolidate their supply chain among fewer, larger facilities.
- One of the biggest goals of the GST is to widen the tax net in an economy where more than 90 percent of workers are employed informally.
- Companies will need to be in the tax system and prove they paid taxes to claim a credit against their costs.
- Pressure to comply will increase along the line and the black economy should shrink.
- Still, the tax may throw up losers.
- Manufacturing states may initially suffer as the extra revenue is generated in more populous consuming states.
- There are also sectors untouched by the new tax, including alcohol and real estate.
- Thousands of tax staff will also need to be trained and complex new IT systems adopted.
- To be sure, India isn’t alone in introducing a new tax that crosses jurisdictions and territories. More than 150 countries have a value added tax or GST including Canada, Australia and the European Union, according to Deloitte.
- The optimistic case is that initial ruffles are soon smoothed over, according to Eswar Prasad, a professor at Cornell University in Ithaca, New York. “As in the case of the recent demonetization gambit, any disruption in commerce and economic activity is likely to be short-lived, while the longer-term benefits could be significant,” he said.
- Big companies will be prepared, Agarwal at Transport Corp. says, but he frets about the smaller, informal businesses. “There’s going to be chaos,” he says. That informal workforce includes Babu Ram Rajput, a 28-year-old trucker in jeans and sandals who regularly drives goods across a vast swathe of north India. “I have not got any training,” he says, holding up a sheaf of tattered, dirty documents related to his current cargo. “I only know that GST is coming.”